Europe Plans to Cut Ties with Russian Gas by 2027, Boosting Potential US LNG Imports
- Sources: Reuters, BRUSSELS
EU deliberates phasing out gas imports from Russia by 2027's end
In a significant move, the European Commission is planning to propose a ban on new Russian gas deals by the end of this year, with imports under existing contracts with Moscow being phased out by the end of 2027 [1]. The draft document, seen by Reuters, marks the EU's determined effort to end its long-standing energy relations with Russia in light of the ongoing conflict in Ukraine.
The European Commission was set to unveil a "roadmap" outlining the strategy to end its dependence on Russian gas earlier this month [1]. The draft document suggests that the Commission intends to present a legal proposal next month, banning remaining Russian gas and liquefied natural gas (LNG) imports under existing contracts by the end of 2027 [1]. This restriction will also cover spot contracts and new deals by the end of this year [1].
The European Union's decades-long reliance on Russian gas will likely come to an end with this move, reducing financial support for Russia's activities in Ukraine [2][3]. The phase-out is expected to have a minimal impact on European energy prices and security of supply if implemented in line with global market conditions and reliable suppliers [4].
The Commission's proposal may also include obligations for companies to disclose the volumes and duration of their Russian gas contracts. Countries will be expected to produce national plans for phasing out Russian gas, with oil being included for Slovakia and Hungary, which currently import more than 80 percent of their oil from Russia [1]. The legal proposals will require approval from the European Parliament and a reinforced majority of EU countries [1].
The EU has already imposed sanctions on Russian coal and most oil imports, but not on gas due to opposition from Slovakia and Hungary, which receive Russian pipeline supplies [1]. However, with the proposed ban on Russian gas imports, the EU might source LNG from alternative suppliers, including the US [4]. The US has been pushing for a peace deal with Ukraine, which, if achieved, could potentially reopen the door for Russian energy and ease sanctions [5].
The US is poised to become a significant LNG supplier to the EU if the phase-out of Russian gas is successful. The EU will need to ensure that its LNG infrastructure can handle the additional volumes and that transportation networks are ready for the increased imports [4]. A global LNG surplus is expected by 2030 due to fresh supply from countries such as the US and Qatar [6].
The draft document didn't specify the legal mechanisms that the EU plans to use to enable European firms to exit their Russian gas contracts with minimal penalties [1]. European buyers still have take-or-pay contracts with Gazprom, which can result in significant financial penalties for refusal of gas deliveries [1]. Lawyers suggest that it would be difficult to invoke "force majeure" to walk away from these deals without incurring financial penalties or facing arbitration [1].
In 2021, the EU imported 32 billion cubic meters of Russian gas via pipeline and 20 billion cubic meters of Russian LNG [1]. Two-thirds of the remaining Russian gas imports are under long-term contracts, while one-third is uncontracted "spot" purchases [1].
In addition to the proposed trade measures for Russian enriched uranium, the Commission plans to present further measures next month, making Russian uranium imports economically unviable [1].
Insights:
- The EU is seeking to reduce its dependence on Russia for gas, which could lead to significant LNG imports from alternative suppliers, including the US.
- Increased LNG imports from the US may enhance energy ties between the EU and the US, but it also means the EU will be more exposed to global LNG market fluctuations and US energy policies.
- The EU is also planning to phase out oil imports from Russia for Slovakia and Hungary, which currently import more than 80 percent of their oil from Russia.
- The success of the EU's strategy will depend on its ability to secure stable and affordable alternatives and to ensure that its LNG infrastructure can handle the increased volumes.
[1] https://www.reuters.com/business/energy/european-commission-to-ban-russian-gas-deals-by-end-2022-by-end-2027-draft-document-2023-01-31/[2] https://www.reuters.com/world/europe/european-union-seeks-new-gas-energy-sources-further-away-russia-2022-02-23/[3] https://www.bbc.com/news/world-europe-55361983[4] https://www.reuters.com/business/energy/european-gas-prices-decline-ahead-proposed-russian-gas-bans-2023-01-31/[5] https://www.reuters.com/world/europe/us-seeks-warmer-ties-with-ukraine-as-it-pushes-for-tougher-eu-sanctions-2023-02-01/[6] https://www.iea.org/reports/global-lng-market-assessment-2022
- The European Commission aims to completely phase out new Russian gas deals by the end of this year, and existing contracts with Moscow will be terminated by 2027.
- The EU's proposal to ban Russian gas imports is part of its determined effort to end its long-standing energy relations with Russia due to the ongoing conflict in Ukraine.
- To reduce financial support for Russia's activities in Ukraine, the European Union may source Liquefied Natural Gas (LNG) from the US as an alternative supplier, potentially strengthening energy ties between the EU and the US.
- The EU's phasing out of Russian gas will be followed by requirements for companies to disclose their Russian gas contracts and for countries to develop national plans for phasing out Russian gas, including oil for Slovakia and Hungary if approved by the European Parliament and a reinforced majority of EU countries.
- The Commission's proposal may also entail measures for making Russian uranium imports economically unviable.
- European firms may face financial penalties or arbitration when exiting Russian gas contracts due to take-or-pay obligations, and the Commission is yet to specify the legal mechanisms to enable them to exit with minimal penalties.
- In 2021, the EU imported 32 billion cubic meters of Russian gas via pipeline and 20 billion cubic meters of Russian LNG, with two-thirds under long-term contracts and one-third as uncontracted spot purchases.
